Adding politics into the alpha investment mix

Date: Friday, June 22, 2012
Author: Philip Holton, HedgeFund Intelligence

Comment by Philip Holton, research and data associate at HedgeFund Intelligence

During the last five years there have been numerous shifts in strategy by managers which can best summarised by a test: do asset managers find the eurozone crisis boring?

This is not a hard test to fail. Seemingly, the only prerequisite of being a macro manager is whether you can guess the next move of whoever is holding the baton of power – whether that is Angela Merkel in Germany, France’s  Francois Hollande or whoever the Greek prime minister is at any given moment.

Markets are more correlated than ever, but not only that, they are correlated to the voice of our leaders – with hedge and alternative UCITS funds collectively taking a hammering in 2011, mainly because they misjudged whether micro calls would drown out the macro noise from Europe. That said, while the majority of funds were down it should be remembered 40% of hedge funds did make a positive return last year.

Long-term value investors often pride themselves on their ability to root out undervalued companies while openly admitting that they are completely useless at ‘timing the market’.

Soon enough this phrase will be revised to reflect that they are useless at timing European politics.

Akin to currency overlays during some of the wild swings over recent years, we could see a larger and larger proportion of performance or even alpha come from ‘political’, let alone macro, overlay.

With this we could also see a changing demographic in the alternative UCITS and hedge fund world – consultants more familiar with Whitehall than Lombard Street may become the vital player in a portfolio manager’s team.

One of two things could happen. The human aspect of trading, that we all thought was disappearing, may be coming back, just not quite how we thought it would.

Or as soon as the politics finally takes a back seat (for whatever reason) – and the fundamentals may suddenly reassert themselves. Longs and short positions on stocks will then act again in the way they did in the days before politics drove the markets,  and these funds could finally score very big gains in the process.